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Financial Accounting

Financial Accounting or Financial accountancy is the field of accountancy
concerned with the preparation of financial statements for decision makers,
such as stockholders, suppliers, banks, government agencies, owners, and other stakeholders.

Financial accountancy is used to prepare accounting information for
people outside the organization or not involved in the day to day running of the
company.

Provision of information used by management of a business entity for decision
making, planning and performance evaluation.

For meeting regulatory requirements.

Graphic Definition

The accounting equation (Assets = Liabilities + Owners' Equity) and financial
statements are the main topics of financial accounting.

The trial balance which is usually prepared using the Double-entry accounting system
forms the basis for preparing the financial statements. All the figures in
the trial balance are rearranged to prepare a profit & loss statement and balance
sheet.

There are certain accounting standards that determine the format for these
accounts (SSAP, FRS, IFS). The financial statements will display the income and
expenditure for the company and a summary of the assets, liabilities, and shareholders
or owners' equity of the company on the date the accounts were prepared to.

Assets, Expenses, and Withdrawals have normal debit balances (when you debit these
types of accounts you add to them)...remember the word AWED which represents the
first letter of each type of account.

Liabilities, Revenues, and Capital have normal credit balances (when you credit
these you add to them).

When you do the same thing to an account as its normal balance it increases; when
you do the opposite, it will decrease. Much like signs in math: two positive numbers
are added and two negative numbers are also added. It is only when you have one
positive and one negative (opposites) that you will subtract.

Meaning of Accounting Equation

The value of a company can be understood simply as the useful assets that ownership
of a company entitles one to claim. This value is known as Owners' Equity. Some
assets of a company, however, cannot be claimed as equity by the owners of a company
because other people have legal claim to them - for example if the company has borrowed
money from the bank.

The value of a resource claimable by a non-owner is called a liability. All of the
Assets of a company can be claimed by someone, whether owner or not, so the sum
of a company's equity and its liabilities must equal the value of its Assets. Thus
the accounting equation describes what portion of a company's assets can be claimed
by the owners.

Various account types are classified as 'credit' or 'debit' depending on the role
they play in the accounting equation.

Assets = Liabilities + Equity or Assets - Liabilities - Equity = 0

Another way of stating it is:

Equity = Assets - Liabilities

which can be interpreted as: "Equity is what is left if all assets have been sold
and all liabilities have been paid".